What a 2,000-Year-Old Roman Taught Me About Landlording

Note from Paula: This is the final installment of my three-part series about my building my real estate empire, one lopsided rotting house at a time. Check out Part 1 — House-Hunting — and Part 2 — Funding — before you read this conclusion.

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NOTE: This article last updated in 2014 (and all numbers reflect that year).

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More than 2,000 years ago, Roman statesman Cicero said that “refusing to set aside trivial preferences” is one of mankind’s most common mistakes.

Clearly Cicero was a landlord.

I’ve been a renter my entire adult life. So when I bought a three-unit property and started showing it to potential tenants, I assumed I’d be an ace at knowing what tenants want. After all, I’m a renter myself – right?

Turns out, my “trivial preferences” are different than everyone else’s.
I’ve always looked for spaces with character. I love cheerful, bright colors that burst from the walls. It’s flavor you’ll never find in a mass-produced market.

So when I had to replace the home’s exterior siding (it was old and starting to rot), I painted the outside a vibrant, uplifting shade of blue. It’s a beautiful contrast to the drab colors on cookie-cutter homes – or so I thought.

Here was my first lesson as a new landlord: homes are “cookie cutter” for a reason. Neutral tones are boring (IMHO), but they’re socially acceptable. They sell better. They increase your chances of finding a tenant. Unfortunately.

This sounds like a small lesson, but it strikes at the emotional core of landlording: You must to set aside your “sense of ownership.”

It’s natural to want to put your personal stamp on your home. This isn’t YOUR house. It’s your tenants’ house.This space doesn’t belong to you – it belongs to your “clients,” the renters. I’m just the guardian, the caretaker.

So as I make upgrades, I have to refrain from stamping too much personality onto my choices. I restrain my “trivial preferences,” as Cicero would say.

Who Wants to Live in a Lopsided House?

Cicero’s lesson actually works to my advantage.

As I described in the previous chapter of this series, the house is lopsided. The floors and walls slant towards the center, and the foundation is sinking into the ground.

I worried this would be a turn-off to tenants. Who wants to live in a lopsided house?

Turns out, tenants don’t care about that. Tenants and owners have different interests.

Owners care about structural stability. Tenants just want to know how much the utilities cost.

If I could make one major upgrade to the house, it would be to level the floors, replace the piping or move some walls around.

That’s not what tenants want. Tenants want a nicer dishwasher.

Which is great news for me. A new dishwasher is easy to install. A major foundational shift is much tougher.

This makes it easy to rent the space. Washer and dryer in every unit? Done. Motion-activated security lights? Done. More insulation so that your utility bills are lower? Done.

These are relatively cheap and easy upgrades – and these are the upgrades tenants care about the most.

Create Win-Wins

Cicero also said one of mankind’s mistakes is “the delusion that personal gain is made by crushing others.” Two millennia later, bestselling author Stephen Covey (The 7 Habits of Highly Effective People) rephrased this more succinctly: create win-wins.

This is the key to good real estate investing. Always create win-wins between yourself and your tenants.
Two months before the former owner sold the building, he re-signed one of the tenants into a lease at a steeply discounted rate. Her rent was far below market value – and far below the rate that she herself paid the previous year.

I asked her why she drove such a hard bargain.

“My heating bills in the winter are ridiculous,” she replied. “I need the cheaper rent to make up for the high heating bills.”

I let her keep her below-market rent for the rest of her lease. But I showed good faith by installing $1,000 of new insulation in the attic above her unit. I also added weatherstripping and re-sealed her ducts.

Ten months later, at lease renewal time, I raised her rent $100 per month. She agreed happily.

This is a perfect example of a win-win. I’ll “earn back” our insulation cost in less than 1 year. She enjoys lower heating AND cooling bills year-round.

Water — City of Atlanta water prices are among the highest in the nation – we averaged a $350 monthly water bill when we bought the place. Our efficiency upgrades (low-flow shower heads, aerators, WaterSense toilets) lowered our water bill to $150/mo. Another win-win between our wallet and the earth.

Trash — I nearly fell out of my chair when I opened my $1,200 annual bill for city trash service. The City of Atlanta charges for trash as through we’re three separate households – tripling the trash bill. Cost: $100/mo.

Maintenance — We save one percent of the purchase price, or $2,250 per year ($187 per month) in “standard” maintenance costs. Round it up to $200/mo for an even number.

Management — Allocating $250 per month for the building in management fees. Yes, I manage the property myself, but I also pay myself for my time. That’s my active income as a manager, not passive income as an owner. If you talk to a landlord who pretends their “profits” are sky-high because they pay themselves $0, they’re engaging in bullshit accounting.

Vacancy: The moment I advertise an opening, a unit fills within hours. (At the next turnover, I raise the rent, and it STILL fills within a couple of hours). Nonetheless, for the sake of being ultra-conservative, I’ll work a $200/month vacancy factor into the equation, despite the fact that I haven’t had a single unplanned vacancy in 4 years.

Total Expenses = $2,161 per month, or $25,932 per year.

Income (as of 2014):
3-Bed/2-Bath: $1,700
1-Bed/1-Bath: $1,100 (This now varies monthly due to The AirBnb Experiment).
1-Bed/1-Bath: $1,150Total Income: $3,950 per month, or $47,400 per year

Cash Flow: $21,468 per year!

What happens with the money? It’s reinvested, of course! The cash flow gets used for renovations.

This creates another win-win. The tenants get to live in a progressively nicer house. Their rent goes directly into improving their living space. And I get to fix the many (many!) problems in this 100-year-old building.

Update 2014: I’m finished renovating the house. I’m now putting the cash flow into aggressively paying off the mortgage, with an ambitious goal of being completely mortgage-free by Christmas 2015 (five years after buying the house.)

Epilogue

Update: I’ve expanded my portfolio, and now earn more than $40,000 per year in passive rental income. I’ve bought House #2, House #3, House #4 and House #5. Read about them here …

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Comments

Awesome series! It’s really interesting to see how all the details turned out.

If I’m doing the math correctly, you could almost be living in the your own house payment free (even though you said you are paying rent) just by collecting the other rents from tenants. That’s pretty cool, considering you’re building equity at the same time.

I’m not ready for homeownership yet, but I could totally see myself going this route once I am. Thanks for sharing!

Great post! I love it that you’re living in one of the unit. I wish I did that rather than buying my first home. We just acquired a 4plex and it is tough to get cash flow positive right away. One unit is still vacant and we need to fill that ASAP.

Great post! I am interested in real estate investing. It’s the first step that is the hardest. I don’t know anything about fixing houses or at all handy but I am not discouraged. I’ll get there some day. I have a goal to buy a house with a rental suite by the first quarter of 2013. I hope to find a property that will become cash flow positive when the entire house is rented out. These are hard to find but not impossible. Hearing your story motivates me to get there one step at all and don’t take no for an answer. Thank you for sharing.

@That Thing — One year ago, I knew NOTHING about fixing houses. It’s amazing how quickly you learn! Have you ever heard the expression: “When you have a hammer, everything looks like a nail”? Well, when you have a fixer-upper, everywhere you look, you start seeing examples/ideas/solutions.

Great article! Don’t let anythig discourage you. I made a lot of money in income property. At one time, I owned a 9 unit, 10, unit, 24 unit and a shopping center. I achieved financial freedom at 38 years old. That was 26+ years ago. I was ale to do the things I wanted to do like starting businesses, consulting and now teaching. Keep it up!

One thing: How did you come up with the $3100/yr in maintenance? I would expect much higher on such a large and old house. You’re probably familiar with the commonly used “50% rule” which states you should prepare for total operating costs to be 50% of your rents. If that’s the case, you’re severely underfunded. Perhaps it’s less of an issue because you guys are doing the work yourself, and I would guess using high quality material.

My REI is completely passive now, but I’m continuing to study others in case I decide to jump in.

@Lindsey — I struggled with this for a minute — “Oh no! This means I have to conform and become cookie-cutter!” — until I realized that I, personally, can decorate and live any way in which I want to. But I’m preparing this house for someone else, not for myself. It puts me in a bit more of a “giving” spirit — thinking of others rather than myself.

Great post. I can’t believe I didn’t see this last week. My wife and I are starting to save our down payment for the first rental property! We’re excited! Reading this series (in one sitting) makes me even more anxious to start investing. 🙂 Thanks for sharing.

@20’s Finances — I’m really excited you’re saving for your first rental! I’m a huge fan of owning rentals. As the series shows, it’s not always glamorous, but it is fulfilling — and it’s a great investment! Keep me posted on your rental experience.

One of the best series I have read in a long time. Thanks for all the interesting insights into home ownership and fixing up places. In order to reach your goals, sometimes you have to sacrifice the comforts of your own private home. I would love to live with another couple for awhile to save up money to buy a house or renter property.

@Tony — It’s important to know what you’d rather do and what you’d rather hire out to someone else! I don’t mind fixing my house, but I’d definitely hire someone to do my online technical support. Fundamentally, you just have to decide: What am I good at and/or what do I want to become good at? and — What do I not want to waste my time doing?

Best of luck saving for a house, and congratulations on your son’s upcoming wedding! 🙂

Great articles – just ‘found’ you recently. I’m considering purchasing my first rental property (two unit / a single bed and a double bed with apartment above 2 car garage – my place until I could move out and rent that too) Could you address any other incidental costs such as advertising (banners, business cards, print / other media), licensing (I assume Atlanta requires this), home inspection, etc. and their impact on your gross / net return, please?
Thanks and congrats.

@Ballastboy — Congrats on your decision to move towards buying rental properties. I’m a huge fan of this strategy and I hope it will do well for you.

I spend $0 on advertising. I use one and only one thing to find tenants: Craigslist. I write a darn good ad with lots of detail, and I upload as many photos as Craigslist allows (4). My inbox is always flooded.

I also don’t have a license; the state of Georgia does not require this. I did form a property management LLC to officially handle the tenants; in Georgia this costs $100 one-time to register, and around $50 per year to renew.

Hi Paula,
Just looking around your place. I’m also a real estate investor tho I don’t usually call myself that 😉 I’m up to 15 rental units now! I enjoyed reading your series on how you got this place and are fixing it up. I had to laugh, one of my houses even the inspector refused to enter it was so bad. But hey, I bought 4 houses there for only $60,000 and with a little work and some cash, I got them all fixed up and they’ve all been steadily earning $500/month ever since. I’m hoping to use my rental income to allow me to move overseas 🙂 That is, if I can’t get my blog to do it 🙂

What I’m curious about is how to get started in this if you already have six figures of educational debt. Is this something that is possible, considering that simply “paying off my debt” prior to getting started is (at minimum) a ten year process. Any advice?

I found your blog just recently. I was interested in your real estate exploits as it’s something I’ve personally never warmed to because my unfamiliarity and discomfort with it, particularly with the illiquidity of the investment though I’ll concede the returns are pretty juicy if you know what you’re doing. It certainly seems that you have found considerable success with it. You have some advantages that I don’t have, i.e. a SO who can analyze a home’s foundation. One question for you: how much did you invest in terms of man-hours and money into renovating the home?

Hi Fawaz,
You know, to be honest, Will has only ever looked at one single foundation — this first house. We were, in hindsight, very naive when we purchased House #1. We had a Do-It-Yourself spirit and thought that we could handle a lot on our own. The reality of rental investing showed us otherwise, and so now Will doesn’t even conduct inspections anymore — we pay a licensed, certified inspector to look at every property. It costs $350 – $400 for a single-family dwelling and $500 for a multifamily structure, and it’s worth every penny.

That’s a long way of saying: Please don’t see Will’s training as an engineer as an advantage; in fact, if anything, it disadvantaged us because it allowed us to live in Delusion Land for a long time. Once we started treating the business like a real business, our results improved dramatically.

As far as man-hours and money — each house has been different. You can see the money invested in House’s #2, #3, #4 and #5 in the following blog posts, which I’ve linked to below.

House #1 was definitely the most costly in terms of both man-hours and money — the renovation cost $110,000 in total, and was a full-time job for a number of months. We learned a lot from this, though, and it made Houses #2 – #5 much better.

I hope that helps! Please stay in touch and let me know if there’s anything else I can answer. Cheers! 🙂

@Tyler — I have to admit, From 0 to 130 properties in 3.5 Years is the ONLY book I read before I started investing in real estate, and it was absolutely instrumental in shaping my mindset (especially in helping me understand the fundamental ways of thinking about a flip vs. a rental).

Other resources that I like:

The Millionaire Real Estate Investor by Gary Keller (founder of Keller Williams) is perfect for beginners. It’s easy to read, covers a lot of material, and has a great section in the back with one-page “case studies” featuring many, many millionaire RE investors who each took drastically different approaches (which highlights that there’s no “one right way” to invest.)

The Book on Flipping Houses — As the name implies, this book is ONLY about flipping, not rentals, but if you want to head in that direction, it’s a must-read. The author, J. Scott, also has a great houseflipping blog called 123flip.com which is addictive.

Cashflow Quadrant — Although this book isn’t specifically real estate focused, it taught me the difference in mentality between an investor, an entrepreneur, and a self-employed person. That mental shift was a serious turning point in my investing career.

The BiggerPockets blog and forum — there are a LOT of voices on here, all with differing opinions on everything, which I enjoy.

The Everyday Property Investing blog and podcast — very intellectual and good for even experienced investors. One caveat: they’re based in Australia, so keep in mind that all the tax/insurance/legal commentary that they make reflects Australian law.

Inspirational, yet frightening 1st purchase story!! I have a question about the finances: How did you pay for the $110k renovation costs? I’m hoping to use your experiences as a loose template for building my own portfolio. Many details that I see as daunting roadblocks, you have managed to overcome, so I appreciate you sharing all of the gory details.